The Next Big Bailout Decision: Insurers

--life insurance companies went down due to their obgligations to variable anuities and exposure to corporate bonds, CRE, and moretages --one stumbling block is that insurers are overseen by state regulators, not a fedral agency --several factors are in insurers's faover: cash flow from premium policyes; low short term liability --ramification of the weakened industry is that lower demand for corporate bonds By SCOTT PATTERSON and LESLIE SCISM The tumbling financial markets are dragging down the life-insurance industry, an important cog in the U.S. economy, as mounting losses weaken the companies' capital and erode investor confidence. A dozen life insurers have pending applications for aid from the government's $700 billion Troubled Asset Relief Program, and the industry is expecting an answer to its request for a bank-style bailout in the coming weeks. The government so far hasn't said whether insurers will be eligible for the program. Life insurers have taken a beating in recent weeks. The Dow Jones Wilshire U.S. Life Insurance Index has fallen 59% since the beginning of the year, leaving it down 82% since its May 2007 all-time high. The Dow Jones Industrial Average has lost 21% year to date, off 51% since its October 2007 record. Some of the hardest-hit companies are century-old names that insure the lives of millions of Americans. Shares of Hartford Financial Services Group Inc., which already received a capital injection from German insurer Allianz, are down 93% as of Wednesday's close from their 52-week high. MetLife Inc. and Prudential Financial Inc. are both suffering as the value of their vast investment portfolios declines. Some life insurers are faring better than others, and some of the nation's giants retain triple-A ratings, including Massachusetts Mutual Life Insurance Co., New York Life Insurance Co., Northwestern Mutual Life Insurance Co. and TIAA-CREF. But as the economy buckles, analysts say many insurers face losses that can eat away at the capital cushions regulators require them to maintain. Long-time experts say the industry is going through its most tumultuous period in recent memory. "It's a pretty scary scenario right now," said Pete Larson, an analyst at Gradient Analytics, a Scottsdale, Ariz., research group. Some state regulators have lately extended relief from certain capital requirements. But insurers haven't received the kind of injections banks got in recent months. That's partly because insurers didn't gobble up risky assets, and also because as long-term investors, they generally don't have to recognize on the bottom line short-term dips in values of their assets. Associated PressLife insurers have been taking a beating in recent weeks. The Dow Jones Wilshire U.S. Life Insurance Index has fallen 59% since the beginning of the year, leaving it down 82% since its May 2007 record high. More MarketBeat: Insurers Face More LossesRatings agencies and stock investors are growing concerned about how long the industry can avoid reckoning with the distressed assets on their books. Rating agencies Moody's Investors Service, Standard & Poor's and A.M. Best have cut the ratings of more than a dozen insurers in recent weeks. The ramifications of a weakened life-insurance industry for the overall economy are significant. Life insurers are among the biggest holders of the nation's corporate debt. Together, they own about 18% of all corporate bonds outstanding, according to the American Council of Life Insurers, or ACLI, an industry trade group. If life insurers stop buying bonds, the capital markets may not fully recover, say insurance industry representatives and analysts. Already, their buying activity has slumped. In the fourth quarter of 2008, life insurers agreed to buy $3.3 billion in stocks and bonds through private transactions, down 63% from the previous quarter, according to a survey by the ACLI. Insurers have been putting more cash into safe havens such as Treasury bonds. Any sign of vulnerability among life insurers could further erode confidence and make jittery consumers reluctant to buy insurance products, analysts and financial advisers say. "I get as many emails from subscribers who worry about their policies as they do about their stock," said Morningstar analyst Alan Rambaldini, who covers life-insurance companies. Though life-insurance and variable-annuity sales fell industrywide in the fourth quarter of 2008, analysts say it is too soon to trace declines to consumer concerns about the stock action. Ratings firms and Wall Street analysts say another problem for some life insurers is obligations for variable annuities, a retirement-income product that often guarantees minimum withdrawals or investment returns. As stock markets plunge to fresh lows, life insurers need to set aside additional funds to show regulators that they can meet their obligations, further crimping spare capital. The industry has several things in its favor. Life insurers will likely continue to generate cash from the premiums on their policies, some analysts and executives say. And unlike investment banks and many other financial firms, life insurers don't need to routinely raise money in the capital markets to fund daily operations. Few of the biggest ones have any sizable debt of their own maturing in 2009. Many insurers have built up big cash chests in recent months, by hoarding their incoming premiums. For now, the Treasury Department hasn't said whether life insurers will be eligible for TARP funds. Industry group ACLI expects Treasury to decide whether insurers will be eligible for federal aid some time later this month. "We don't have a clear picture of which way that clarification would tend to go," said ACLI representative Gary Hughes. The Treasury Department didn't return calls for comment made late in the day. One stumbling block is that the industry is overseen by state regulators, not a single federal agency. That means there's no group of federal officials responsible for it or with a deep understanding of its challenges. The problems plaguing life insurers aren't the same as those at insurance giant American International Group Inc., which has received a $173 billion aid package. Its losses stemmed largely from derivatives, primarily credit default swaps, tied to complex securities that turned sour in the credit crunch. Life insurers' woes have come largely from investment-grade corporate bonds, commercial real estate and mortgages, regulatory filings show. Many insurers ended 2008 with high levels of losses that, due to accounting rules, they haven't had to record on their bottom lines. MetLife, the nation's biggest life insurer by assets with $380.84 billion in its general account, had $29.8 billion in unrealized losses at the end of 2008. MetLife says it is amply capitalized, with more than $30 billion in cash, and that it doesn't expect to realize significant losses from its investment portfolio. "We strongly believe that the way we've looked at our unrealized gains and losses is appropriate for our liabilities and for the most part that these [investments] will pay off," said MetLife spokesman John Calagna. Hartford Financial had $14.6 billion in unrealized losses at year's end. Prudential, the second-largest insurer by assets, had nearly $11.3 billion in unrealized losses, up $5.4 billion in the fourth quarter from the previous quarter. Hartford didn't respond to requests for comment. A Prudential spokesman said, "We believe that we are adequately capitalized based on our objective of a double-A rating." —Jessica Holzer and Michael R. Crittenden contributed to this article. Write to Scott Patterson at scott.patterson@wsj.com and Leslie Scism at leslie.scism@wsj.com